2018 (5) TMI 346 - AT - Income Tax

Addition on account of transfer pricing adjustment - deductibility of such payment in terms of section 37(1) - Held that - AO in his order has taken the ALP of the international transaction at Nil on the basis of such recommendation of the TPO without carrying out any independent investigation for the deductibility or otherwise of such payment in terms of section 37(1) of the Act. This addition has been made by the AO in his order without invoking section 37(1) of the Act. As the TPO in the instant case initially determined Nil ALP by holding that no benefit accrued to the assessee etc. and the AO made the addition without examining the applicability of section 37(1) of the Act we find the actions of the AO/TPO running in contradiction with the ratio laid down in Cushman 18.59 crore with the corresponding opening figure at 3.84 crore as against the amount of shareholders fund at 399.71 crore at the close of the year and 161.91 crore at the beginning of the year. This proves that the amount of investment in the Units etc. yielding exempt income is much less than the amount of shareholders funds. We uphold the impugned order in deleting the disallowance of interest u/s 14A at 45, 86, 464/- against which the Revenue has preferred this grievance before the Tribunal. This ground is not allowed. Disallowance of claim of depreciation @ 60% on UPS as against 15% - Held that - We find that the issue of allowing depreciation at higher rate on computer peripherals is no more res integra in view of the judgment of the Hon ble Delhi High Court in CIT vs. BSES Yamuna Powers Ltd. 2010 (8) TMI 58 - DELHI HIGH COURT wherein the entitlement to the higher rate of depreciation on computer peripherals has been laid down by deciding the issue in favour of the assessee.

Summary

Issues Involved:
1. Transfer Pricing Adjustment
2. Disallowance under Section 14A
3. Depreciation on UPS

Detailed Analysis:

1. Transfer Pricing Adjustment:
The first issue revolves around the addition of ?1,11,72,735/- on account of transfer pricing adjustment. The assessee, engaged in manufacturing sheet metal components and other products, declared international transactions totaling ?5.26 crore. The Transfer Pricing Officer (TPO) disputed only the commission payment to its associated enterprise (AE), M/s Bull Moose Tube. The assessee justified the commission payment under the Profit Split Method (PSM), but the TPO found no substantial evidence supporting the arm's length price (ALP) and determined the ALP at Nil using the Comparable Uncontrolled Price (CUP) Method. The CIT(A) allowed 75% of the commission as a deduction, reducing the disallowance to ?27,93,184/- and providing relief of ?83,79,551/-.

Upon review, the Tribunal found no basis for the 75% deduction allowed by CIT(A). The Tribunal highlighted that the TPO's use of the "Benefit test" was inappropriate, referencing the Punjab & Haryana High Court's ruling in Knorr-Bremse India P. Ltd. vs. ACIT, which stated that the arm's length nature of a transaction is not contingent on profit increase. The Tribunal also noted that the TPO failed to provide comparable uncontrolled instances as required by rule 10B(1)(a)(i). The Tribunal set aside the impugned order and remanded the matter to the AO/TPO for reassessment in line with the jurisdictional High Court's ruling in CIT v. Cushman & Wakefield (India) (P.) Ltd., emphasizing the AO's role in determining the deductibility under section 37(1) of the Act.

2. Disallowance under Section 14A:
The second issue pertains to the disallowance under Section 14A, where the assessee earned exempt dividend income of ?20,11,752/- but offered no disallowance. The AO invoked Rule 8D, resulting in a disallowance of ?51,47,448/-, which included an interest component of ?45,86,464/-. The CIT(A) restricted the disallowance to ?5,60,984/-.

The Tribunal upheld the CIT(A)'s decision, referencing the Bombay High Court's ruling in CIT vs. Reliance Utilities and Power Ltd., which established that if an assessee has sufficient interest-free funds, it can be presumed that investments were made from these funds. The Tribunal also cited the Karnataka High Court's ruling in CIT & Anr vs. Microlabs and the Supreme Court's judgment in Godrej & Boyce Manufacturing Company Ltd. vs. DCIT, reinforcing that no disallowance of interest can be made if interest-free funds exceed the investments. Given that the assessee's shareholders' funds were significantly higher than the investments, the Tribunal found no basis for the disallowance of interest and dismissed the Revenue's appeal on this ground.

3. Depreciation on UPS:
The final issue concerns the disallowance of depreciation on UPS. The assessee claimed depreciation at 60% on UPS worth ?1,39,428/-, but the AO restricted it to 15%, resulting in a disallowance of ?48,460/-. The CIT(A) deleted this addition.

The Tribunal upheld the CIT(A)'s order, referencing the Delhi High Court's ruling in CIT vs. BSES Yamuna Powers Ltd. and the ITAT Special Bench decision in DCIT vs. Data Craft India Ltd., which affirmed the entitlement to a higher rate of depreciation on computer peripherals. Consequently, the Tribunal allowed the higher depreciation rate as claimed by the assessee.

Conclusion:
The Tribunal partly allowed the appeal for statistical purposes, setting aside the transfer pricing adjustment issue for reassessment, upholding the CIT(A)'s decision on the disallowance under Section 14A, and confirming the higher depreciation rate on UPS. The order was pronounced in the open court on 02.05.2018.